When markets are performing well, it is perfectly natural for investors to look at the latest “best-performing funds” tables and wonder whether they should switch into the current winners. After all, if a fund has delivered exceptional returns over the last year, surely that success is likely to continue?
In reality, the evidence suggests the opposite.
One of the biggest mistakes investors can make is chasing recent performance. While it can feel reassuring to invest in a fund that has just had a fantastic year, history shows that yesterday’s winners are often tomorrow’s average performers — and sometimes even tomorrow’s disappointments.
Research into UK investment funds has consistently found that strong short-term performance is very difficult to repeat. Studies show that if a fund is in the top quartile of its sector one year, the chances of it remaining in the top quartile the following year are only around 30% to 40%. More recent studies have been even less encouraging, with some sectors seeing almost none of the previous year’s top-performing funds remain at the top over the following two years.
In other words, last year’s winner is statistically unlikely to be next year’s winner.
There are several reasons for this. Markets constantly change direction, with different sectors and investment styles coming in and out of favour. A fund that benefited from a particular trend – such as technology shares, commodities, or smaller companies — may struggle once market conditions shift. In many cases, exceptional short-term performance can also involve taking higher levels of risk, which may not become obvious until markets turn.
Another issue is investor behaviour itself. Funds that appear at the top of performance tables often attract large amounts of new money. Ironically, this can make it harder for fund managers to repeat their previous success, particularly in specialist or smaller areas of the market. This was one of the main causes of the downfall of Neil Woodford’s funds – he was far too successful in attracting new money.
This is why successful long-term investing is rarely about trying to predict the next “hot” fund. Instead, it is usually about building a diversified portfolio aligned to your goals, attitude to risk, and time horizon. The best-performing funds often have only a 10% chance of remaining top-quartile over a 10-year period, making a “middle” fund a, perhaps surprising, safe bet for long-term investors. Not quite as exciting, but much more likely to get to the result you wanted in the first place.
Good investing is often less exciting than the headlines suggest. Patience, discipline, and consistency tend to matter far more than trying to jump between whichever funds have recently performed best.
As the old saying goes: past performance may tell an interesting story — but it is not necessarily a reliable guide to the future.
